Use commercial bank and Federal Reserve Bank balance sheets to demonstrate the immediate effect of each of the following transactions on commercial bank reserves. Assume the initial reserve ratio is 20 percent. Fill in the appropriate columns of the balance sheets below for each of the following transactions. Consider each transaction separately, not cumulatively. a. Federal Reserve Banks purchase $2 billion worth of securities from banks.
b. Commercial banks borrow $1 billion from Federal Reserve Banks at the discount rate.
c. The Fed reduces the reserve ratio from 20 percent to 19 percent.
Instructions: Enter your answers as a whole number. Place your answers in the gray-shaded cells using both tables below
Consolidated Balance Sheet: All Commercial Banks 1 2 3 Assets: Reserves $ 33 $ 39 $ 25 $ 40 Securities $ 60 $ 60 $ 60 $ 53 Loans $ 60 $ 60 $ 60 $ 60 Liabilities and net worth: Checkable deposits $ 150 $ 150 $ 142 $ 150 Loans from the Federal Reserve Banks $ 3 $ 9 $ 3 $ 3 < Prey 3 of 6 Next >
Consolidated Balance Sheet: 12 Federal Reserve Banks 1 2 3 Assets: Securities $ 60 $ 60 $ 52 $ 67 Loans to commercial banks $ 3 $ 9 $ 3 $ 3 Liabilities and net worth: Reserves of commercial banks $ 33 $ 39 $ 25 $ 39 Treasury deposits $ 3 $ 3 $ 3 $ 3 Federal Reserve Notes $ 27 $ 27 $ 27 $ 27 d. Now review each of the above three transactions, asking yourself these three questions: (1) What change, if any, took place in the money supply as a direct and immediate result of each transaction? (2) What increase or decrease in the commercial banks' reserves took place in each transaction? (3) Assuming a reserve ratio of 20 percent, what change in the money-creating potential of the commercial banking system occurred as a result of each transaction? Transaction a: 1. The money supply decreased Tincreased 2. Reserves from $33 billion $ 39 billion. < Prey 3 of 6 Next >
Transaction a: 1. The money supply Idecreased 2. Reserves increased from $33 billion to $ 39 billion. 3. Money-creating potential increased | by billion. Transaction b: 1. The money supply by billion. 2. Reserves from $33 billion to billion. 3. Money-creating potential by billion Transaction c: 1. The money supply 2. Reserves from $33 billion to billion. 3. Money-creating potential | by billion.